1. ¹is the Senior Research Analyst at FGS Capital LLP. He is responsible for quantitative equity investment strategies in Europe.
2. ²is Professor of Accounting & Finance at the Cass Business School. Most of his research focuses on the UK investment trust industry.

Correspondence: Michael Steliaros, FGS Capital LLP, 20 St James's Street, London, SW1A 1ES, UK, Tel: +44 (0)20 7451 2148; E-mail: msteliaros@fgscapital.com

Received 5 July 2006.

Abstract

This paper investigates the impact of countries and sectors as variables in explaining the cross-sectional variability of price returns for a sample of over 1,900 companies comprising the MSCI Developed World Index, drawn from 21 countries, over the period 1992–2001. For the value-weighted world portfolio, the country effect dominates, although the sector effect increases markedly, and the country effect decreases in the post-2000 period. The country effect is, however, much stronger when the largest 300 companies are excluded from the analysis. The same pattern is observed for the portfolio comprising companies from the EMU countries. For equally weighted portfolios, the apparent dominance of the sector effect is largely attributable to the inclusion of the TMT sector. The negative trend in market-wide indices and the volatility experienced at the end of the sample period also account for the assertion that the sector effect has overtaken the country effect in the post-2000 period.